Coming around

Commentary: Picks in retail, tech and healthcare

By

BrettD'Arcy

SAN DIEGO (MarketWatch) -- What a difference seven months makes to investors.

It would have been hard to imagine in March equity indexes would climb over 50% by the end of October. In March, the economy was facing the nationalization of the banking industry, collapse of the U.S. auto industry, mounting job losses and a deepening recession.

The most common mistake during the spring of 2009 was to not understand the timing difference between stock market prices and lagging economic indicators and events. Stock prices are forward-looking and are not coincidental with current economic measures. Inexpensive stock values, the injection of massive liquidity into the system (stimulus packages), and better cost containment by corporations were mistakenly viewed as the "beginning of the end" by some investors.

TRADING STRATEGIES: NOVEMBER
The home stretch
With earnings behind us and the holidays ahead, investors are looking
for an easy sprint to the end of the year. But this year has shown us
surprises around every corner. Let our experts guide you through the
last leg.

As the last two months of 2009 lay before us, investors are faced with a difficult set of options. Investors are polarized between two extreme market measurements. The pessimists have focused on the stock market advance since the March lows and are convinced the best trading days in the market have already occurred. Conversely, there is a group focused on the all-time market highs from October 2007. Since Oct. 16, 2007 the Standard and Poor's 500 Index
SPX, -0.55%
is still down over 30%. This group does not consider a bull market will exist until the 1565 level of the S&P 500 is eclipsed. So who is correct?

Neither. The fundamental mistake is to frame current investment decisions against any extreme; high or low. A great equalizer in the under-versus-over value-debate is the stock's price-to-earnings ratio. A glance at the price-to-earnings ratio of the S&P 500 would indicate that the stock market, on a historical basis, is fairly valued with a P/E of 17.63 times. In November, what strategies will offer investors the best chance of growing their assets for the final two months of the year?

Looking forward

The remainder of the fourth quarter will be driven by three fundamental concepts: consumer spending, corporate earnings and employment. The last two months of the year will also encompass the holiday shopping season. Last year, the holiday shopping season was a disaster. The expectations for 2009 are low due to a 9.8% national unemployment rate. It would not be surprising for the unemployment rate to reach 10% by year-end.

However, should this rate improve, then stocks may continue to flourish. For small cap investors the Forward Growth Fund
HSPGX, +0.04%
provides relatively good exposure to retail stocks (11.64% of assets), technology (26%), and healthcare (6.5%). For the value oriented investor, the Heartland Value Plus
HRVIX, +0.46%
fund might be a better fit. The commitment to dividend paying small company stocks makes this fund less volatile and more disciplined than many funds in this asset class.

The next 12 months will likely be characterized by an announcement that the recession has ended, improving corporate earnings, higher inflation, higher interest rates, less unemployment and higher stock values.

In this initial recovery phase it will be important to have exposure to low leverage and high cash flow companies. For this allocation, consider overweighting the technology sector. A great option is the iShares North American Technology Sector Index
IGM, -0.39%
This inexpensive ETF has exposure to technology companies such as Microsoft Corp.
MSFT, -1.33%
Apple Inc.
AAPL, -0.45%
IBM
IBM, -0.77%
Cisco
CSCO, -1.70%
and Google
GOOG, +0.81%

For the contrarian investor, a healthcare ETF may make more sense. This sector is financially sound, requires little borrowing from the credit markets and enjoys a demographic "tailwind." However, it has been held back by the legislative overhang that exists due to national reform initiatives. If the execution of reform is less than the threat, investors could benefit by holding the Vanguard Health Care ETF
VHT, -0.28%
This security is dominated by large pharmaceutical companies and enjoys an affordable operating expense ratio of .25%.

The single biggest risk for the next 12 months will likely be inflation. Currently, the U.S. economy is experiencing deflation. But just as the stock market appeared unlikely to climb just before the most recent rally, inflation may seem equally unlikely. Prudent investors should take steps now to better position their investments for inflation. Fidelity (Fidelity Inflation Protected Bond
FINPX, -0.26%
) and Vanguard (Vanguard Inflation Protected Securities Fund
VIPSX, -0.31%
) offer solid inflation protection options for mutual fund investors. For investors who prefer individual bonds, buying specific Treasury Inflation Protected Securities with 5 or 10 year maturities may offer a better alternative.

Although the year is rapidly coming to an end and Santa Claus rallies and the January effect will begin to creep into the lexicon, November is an important time for investors to seek tax benefits from security trading and profitably position themselves for the New Year.

Brett D'Arcy is chief investment officer for CBIZ Financial Solutions Inc., an SEC registered investment adviser headquartered in Cumberland, Md. D'Arcy's recommendations involve an element of risk. A professional adviser should be consulted before implementing any of the options presented.

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